Moving Average Crossover

Moving Average Crossover
The moving average crossover occurs when a faster or shorter moving average crosses over a slower or longer moving average. As discussed in previous articles, a moving average is an indicator used in technical analysis that shows the average value of a security’s price over a set period of time. This average tracks the trends of a security by smoothing out daily fluctuations or “noise” that can confuse interpretation of the financial markets.

When moving averages move through each other, or crossover each other, it provides trading signals that technical analysts call “moving average crossovers.” The fast moving average is the average formed by the shorter period, whereas the slow moving average is the average formed by the longer period. As the changes in price occur over time, the “fast” moving average moves upward or downward, reflecting the price, and it does this quicker than the “slow” moving average.  As a result of these upward or downward movements, the moving averages crossover each other providing trading signals to the investor.

When the shorter-term moving average crosses “below” the longer-term moving average, this creates a “sell” signal (bearish signal). Conversely, when the shorter-term moving average crosses “above” the longer-term moving average, this creates a “buy” signal (bullish signal). Basically, a moving average crossover indicates a change in trend.

When looking at the speed of the systems when using the moving average crossover, the numbers of signals that are generated depend on the length of the moving averages. Typically, shorter moving average systems will be faster and will generate more signals for early entry into the markets. However, they also tend to generate more false signals than systems using longer moving averages. Due to this, and other reasons, it is very important that traders use this method in conjunction with other technical analysis tools and indicators.

Continue to review the weekly entries and read about the different types of moving averages and also read the entries that identify candlestick chart patterns used when conducting candlestick analysis. You can read about the morning star candlestick pattern, the hanging man candle, and the evening star candlestick and you can learn about what each of these patterns indicates is occurring in the markets. You can also check out our Stock Market Glossary that includes Stock Market Definitions and terminology.

Learn today how you can increase the probability of making profitable trades through combining moving averages with Japanese Candlesticks!

Please also continue your technical analysis education and read about the moving average convergence divergence (MACD) indicator.